Mr Lane says he thinks more interest rate cuts will happen, following last week’s cut of 25 basis points by the ECB. “If we see progress, then we will continue to bring down the level…and eventually normalise rates,” he said.
“If we don’t see progress, then we will go more slowly.”
Speaking to the Banking and Payments Federation Ireland’s national banking conference in Dublin, Mr Lane said it should be clear from the high level of uncertainty, and the still-elevated price pressures, “that we will need to maintain a restrictive monetary stance, following a data-dependent and meeting-by-meeting approach to determining the appropriate level” of interest rates.
“We are determined to ensure that inflation returns to our 2pc medium-term target in a timely manner, and we will keep policy rates sufficiently restrictive for as long as necessary to achieve this aim,” Mr Lane said.
“We are not pre-committing to a particular rate path and will continue to take a meeting-by-meeting approach to determining the appropriate level and duration of restriction.”
In a “fireside chat” with Richard Curran, the RTE presenter and Sunday Independent columnist, Mr Lane was asked whether the ECB is keeping an eye on the current fluctuation in exchange rates. The euro has dropped about 4pc against the US dollar this year, and the currency weakened further this week following the results of the European Parliament elections. There is now speculation that the euro and US dollar may eventually reach parity.
Mr Lane says the ECB does watch movements in the exchange rate. “If we saw a big exchange rate movement, of course, this would be a matter for us,” he said. But he stressed that the exchange rate has been “incredibly stable” and the fluctuations we are seeing would be “invisible in an inflation calculation”.
“We have monetary policy to suit the euro area. We are not subordinated to the Fed,” he added.
Asked about the length of time the ECB had taken before finally deciding to cut interest rates at its June meeting, Mr Lane, a member of its executive board, saying it had received four forecasts in total since last September that predicted by late 2025 the rate of inflation would have eased to the target of 2pc.
“So we’ve waited quite a long time to really solidify that we’re on the way back to 2pc before making this [decision],” he said. “One way to deal with uncertainty is a little bit of wait. Wait, make sure you’re not taking a stance that you’re going to regret.”
Mr Lane noted that wage growth is still elevated, but driven by an ongoing adjustment to the previous inflation surge. The growth rate of pay per employee was up from 4.9pc in the fourth quarter of 2023 to 5pc in the first quarter of this year, largely reflecting an increase in negotiated wage growth.
“This stronger growth in the first quarter includes very large one-off payments in the German public sector,” he said.
Mr Lane added that forward-looking wage trackers show that levels will remain elevated this year but will decelerate in 2025. “This negatively sloped profile for wage growth helps to underpin the projected decline in inflation in 2025, with less pressure from labour costs next year.”
